Friday, February 24, 2012

I have been planning to buy a motor bike ever since I moved out of college. I started shortlisting some of the models 2 months back keeping in mind that the bonuses season was fast approaching. The excitement was all there and everything was in place except, of course, the required moolah. The day finally came, lightning struck, and I was left wondering whether I can afford a bike or not. This led me to start considering the option of buying a used bike. I spent my last one week looking for a decent bike which would provide some good value for money. But naaah..nothing seemed to click. This reminded me of a great explanation which an economist George Akerlof published in 1970. Let me try to explain that you in this post.

Imperfect Info Playing Spoilsport??

Lets assume that I am willing to buy a bike for anything less than, say, 70 Rs. This means I value the bike no more than 70 Rs. To strike a deal, I need to find some one who owns that bike and considers its value as less than 70. The whole procedure sounds good since I think there would be plenty of guys who would be willing to sell their bike for for say, 45 Rs. For the sake of simplicity let me assume that all bikes are of the same brand and make. Also, let me assume that either a bike is well maintained and worth 70 Rs to the buyer, Or it is ill maintained and worth zero Rs to the buyer. I am taking extreme figures just to make things less complicated and am sure this would not affect the conclusion. Now here is the twist. Whether the bike is worth 70 Rs is some thing that I would know only when I have used it for a considerable amount of time. If I assume that half of all bikes are ill maintained, then I have just 1/2 probability of getting a decent bike if selected at random. If I behave rationally, I would be willing to pay 70/2 i.e. 35 Rs for a bike since the chances of it being worth 70 are 50%. The seller of the bike on the contrary already knows whether the bike is well maintained or not. Since he values his well maintained bike at 45 Rs he would never be willing to sell it for 35. Hence I will not have any decent bikes for offer. The only offers I will get will be from sellers who already know that their bikes are worth nothing. This would again reduce the probability of getting a good bike to much less than 50% and I would be forced to bid for even lesser that 35. This will go on and hence I would never be able to find a decent second hand bike for the amount of money I am willing to pay.

This phenomenon arises because of imperfect information or rather imperfect distribution of information. The seller knows far more than what I know and this will eventually lead to the vanishing of whole market altogether. Imperfect information is again the cause of problems in insurance industry and high premiums that we have to pay for health insurance. In the later case its the buyer of health insurance who has relatively more information than the seller.

The only solution that exists in such cases is to reduce the gap of information between a buyer and seller by educating the one with less information. We do have some companies doing this in India who check used cars/bikes throughly and then explain to the buyer the true value of the used automobile. These companies come in the form of preowned car companies like Mahindra First Choice and will play an important role in keeping the used cars/bikes market alive. But as of now, my search for a good bike is still on.

Wednesday, February 15, 2012

Amazon recently launched its price comparision venture Junglee.com in India, a company which it had bought 14 years ago for $250 million. You can not directly buy anything from the site but rather are redirected to the third party vendors who do the billing and delivery. Junglee will aggregate products from different websites such as Homeshop18, Univercell, Hidesign, Gitanjali, The Bombay store, Fabindia, Bata, Dabur, Reebok and ofcource Amazon.com.

Here are some myth busters

1) Amazon thinks that this is the best strategy to enter India

All over the internet I am reading discussions over why this model is innovative and awesome. The fact is that they dont have any other choice. Restrictions on FDI in retail in India mean that Amazon can not have an Amazon.in very soon. This leaves them with no choice but to enter the market as an aggregator. There is some substance though in this move too. Junglee will give Amazon some important insights about Indian buyer's mentality and a loyal customer base which it can exploit once the Govt. approves FDI in retail.

Secondly, This will dilute the e-commerce market substantially. In retail industry its extremely important to not let your competitors gain the advantage of scale. Junglee would help a lot of small players to get a bigger pie of the market and hence will make the major players like flipkart.com loose some of their market share. This would mean that when Amazon enters india there wont be a handful of e-commerce giants with enough economies of scale to counter the financial muscle of Amazon.

2) Amazon overvalued a company which no one knew in India and ended up paying $250 million for a domain name

I would have loved it if this was true. Would have made a funny story. But Amazon paid this much amount not for the existing customer base of Junglee but for the technology it developed to manage and compare enormous amount of data from many sources. This was later also used to evolve the Amazon market place. (Though marketplace found its nemesis in ebay and never really fared well)

3) Flipkart is screwed now

Yes its true that if you pick a random book on Flipkart and check its price on Junglee you will in most probability find the book much cheaper on Junglee. But the products are provided by third party websites which existed even before the launch of Junglee and Flipkart grew inspite of them. Its also true that Junglee will give these small websites the visibility and scale to compete with Flipkart but the fact that Flipkart serves 30,000 customers daily, providing highest level of satisfaction, can not be ignored. The strength of Flipkart is its excellent delivery system, convenient payment options and consistent service level. The small vendors, if they fail to show similar strengths( they have failed miserably until now), would not be able to compete on price points for long. The equation in terms of its strengths is still unchanged for Flipkart.

Tuesday, February 14, 2012

If marketing has one goal, it's to reach consumers at the moments that most influence their decisions. That‟s why consumer electronics companies make sure not only that customers see their televisions in stores but also that those televisions display vivid high-definition pictures.

Very often we hear talks about politics in office and politics in business. I am curious as to how we can apply business sense to politics (governance to be precise). I have been seeing this battle between the civil society and the government. The whole idea of creating a lokpal which has complete authority and making it answerable to none, and hoping that this body will remain incorruptible and will act in public interest and not for personal gains, does not instill much confidence. I wont go into the details of this overly discussed topic, but frankly, i dont want to fight again after a few years for a Lok-lokpal ( an independent body to monitor lokpal ). We should keep in mind that most of today's problems are the results of yesterdays short sighted solutions.

Coming back to the topic, We dont see as many monitoring bodies in corporate sector, nor do we see such lengthy debates on the rules and regulations. But still we consumers keep on getting better services and products every other day. The life style of an avg Indian has improved drastically in last few years. This is not because of exceptional governance, but because of a very competitive and active corporate sector.

Can we take cues from the corporate sector and make our govt more efficient as well?? After all political parties can always be seen as companies with politicians as employees while the citizens of the country being customers. Like companies fighting for customers' money, the political parties fight for our votes.

I have always been a firm supporter of capitalism and believe that an open market place can solve most problems of modern times. So what do we have to do to make our govt more efficient?? The answer is the same as to what we do to make companies produce better products at cheaper rate. We make political parties compete for our votes. But we already have a system to do this. After all democracy means different parties competing for public approval to rule a nation. So we already have a market place. Then how do we make it 'open' or more competitive. We do this by being a more aware consumer. The moment our 'parties' realise that their customer responds sharply to any change in the quality of product, they will start giving us better product/services.

Here I will have to discuss something called the 'elasticity'. If we respond very sharply to a corruption scam by voting out the ruling party in the next election, they we will be considered very elastic. Being elastic and being aware are the best ways to increase the sense of competition among political parties.

So the answer to the problem of corruption is not to create new rules. The answer is to respond sharply by using the power that we already have. By being an informed voter. This may sound cliche, but the truth is, Tata tea's jaago re campaign did more good to the country than Anna Hazare's fasts.

Any one who has read even a little bit finance or economics will know that the amount of returns you expect is directly proportional to the amount of risk that you take . Greater the risk..greater the returns. Similarly, more the effort..greater the returns( keeping the skill and capability factor constant). So how does this apply to our expectations from a particular profession?? Obviously we accept that a bollywood superstar will be paid ( in terms of financial or other gains ) much more than an IT engineer with modest capabilities. This is because the risk of failure for Shahrukh Khan was much more than the risk faced by an IT engineer. The other factor which determines the compensation benefits for a profession is the demand supply equation. You expect a premium when the supply of a professiopnal service is much less than the demand for it.

Lets say you want to become an engineer. You work hard in your eleventh twelve. Spend a certain amount of your money on tuition and college fees. Study( though not much ;) ) during your engineering days. And then expect a well paying job. During your engineering days your parents can proudly say "mera beta engineering college me hai". Your family, more often than not, supports your ambitions and wants you to dedicate yourself fully to your studies. The risks that you face are negligible. coz if you dont clear IIT-JEE you will atleast get into some other college. Worst case scenario is that you take a drop and get yourself into the worst engineering college in the country. But you will atleast be an engineer with a respected professional degree and a hope to become something in life after doing you MBA.

Now imagine that you want to be a politician( MP, MLA or PM depending upon how ambitious you are).

You have to start as a vella volunteer after which you will graduate to chhutbhayya neta or a struggling youth leader. You spend most of your prime days totally broke, walking in rallies which mean nothing, without any respect in the society, ogling at groups of women with not so manly men, dealing with thugs and gundas, licking the ass of senior leaders, begging for votes for some other leader who you know is an asshole.

The risks that you face in this " dad is ashamed of you " passion of yours is immensely high. You can either end up in jail for few years, or end your political career after you no longer have a chance to enter any other professional education or struggle all your life as chhutbhayya neta helping colony waala uncle in avoiding transfer in his govt job( most people fall in this category). Also include the tons of money that you spend all this while in hope of reaping a harvest some day. The best case is that you become successful and get a 'ticket' from some leading party and spend the rest of your life fighting media, party leaders, opposition and god knows who.

What do you expect against all this effort and risk( I am stressing on this here bcoz the chances of failure are quite high(like in bollywood) and the downside is immense) ?? A white ambassador and few lakhs which you most probably will end up loosing after your five years tenure?? It makes sense for any rational being to amass as much wealth as possible during the five years of his office so that the future of his family is secured and at the same time he is compensated for loosing the golden years of his life.

Secondly, we never read in newspapers, complains about scarcity of good engineers as often as we do about good leaders. The fact that we always think there are no good leaders in the country suggests that there is a huge demand and supply gap in this profession with demand exceeding the supply by a huge margin. In such a case our Netas do deserve a huge premium over other professions when it comes to financial compensation.

Considering all this, its but natural for a Neta be corrupt and acquire money which he is denied inspite of deserving it. So by expecting our leaders to be totally honest are we asking for too much?? In the past, kings ruled in the interest of people and dedicated their life for the welfare of the society. But the amount of love , respect, and wealth that they got in return was immense. Are we doing anything for our leaders to command the honesty that we are demanding??

True that the country is lacking good leaders in political structure. But the fact is, we are not doing much to change this. We are not giving enough incentives to well qualified and honest people to take this great risk of entering politics. We have to either lower the entry barrier to this profession and offer more incentives( legal incentives, not the money through scams route). Preferably we should do both so that our leaders don't feel the need of being corrupt and feel the pinch of guilt while engaging in any malpractice.

PS : If you think this is worth more discussion, please help me reach more people by sharing this with your friends.

There was a time when fed up by the harassment by capitalists a group of workers decided to fight for their right in a peaceful way. They came together and declared that they wont work in the factories till all their demands were accepted. Their demands were reasonable and justified back then. They were fighting for a right cause in a not so right ( I call it blackmailing ) way. We justified the means by arguing that the ends were right. Decades later, economies world over faced this huge problem of workers’ unions holding economies on ransom for clearly unreasonable demands. The result today is Air India employees going on strike for pay hike when the company is making huge losses and Bengal being ‘bandh’ against every thing that remotely smells business friendly.

Do the ends justify the means?

Imagine a case when there has been a terrorist attack on a major town with hundreds dead and there is a wide spread sentiment against terrorism sponsoring nations like Pakistan. The people might feel that the government is too idle and not aggressive enough. Now imagine that a very respectable and honest man calls out that the government is influenced by international bodies and hence he would fast till the government does not declare a war on its neighboring country. There is a fair possibility that he would get ample support from certain sections of the society in his protest against the cowardness of the government. Government inspite of knowing the pros and cons of a war and knowing the right thing to do will come under pressure to act against its own wisdom just because of a huge crowd of people who don’t even know what a war means. If we tolerate an Anti-corruption campaign right now we will have no reasons to not accept this anti-terrorist campaign then.

This is what is happening right now. The previous two cases are very similar to the Anna Hazare campaign where most of the people in the march don’t even understand the Lokpal bill fully. Firstly we are accepting a system where people instead of voting a government out just prefer to hold it at ransom.

I find the anti corruption movement to be very similar to the naxalite movement where in both the campaigns instead of bringing the right government want to over power the government with their own bodies. Both the movements have emerged because of the inefficiency of the government to react to people and the belief among citizens that revolution against the government is the only answer. While one is violent the other is a more peaceful but equally dangerous one.

About Me

An engineer by education, banker by profession and marketeer by interest. An accidental entrepreneur and forced music lover. I dont play guitar and do not own a camera. The content of the blog is a result of my observation of events around me and the interactions with the wise men I am surrounded by. The work should in no way be treated as my original literary work. " Idam na mam"